Rising Appetite for Stocks Subdues Investment in Bonds



By Obinna Chima

In recent weeks, activities in the domestic bonds market have remained subdued owing to renewed interest in the equities market as well as investors’ interest in shorter tenored fixed income securities (treasury bills and Open Market Operation) trading at more attractive rates over the longer tenored bonds.

As such, the trend was sustained last week as marginal swings in average yield were recorded.

The bulls consolidated their hold on the stock market last week as investors’ sentiments remained positive. The market was upbeat throughout the week due to renewed demand by bargain hunters. Many of the investors were taking position ahead of corporate half year financial results announcement.

 Consequently, the Nigerian Stock Exchange (NSE) market capitalisation closed at N11.464 trillion on Friday, while the NSE All-Share index closed Friday at 33,261.66 basis points.

On the other hand, analysts at Afrinvest West Africa Limited, revealed that at the start of the week, average yield across all trading instruments rose four basis points to 16.9per cent (from 16.8% on the preceding Friday) majorly due to sell offs in the JUL 2017 and AUG 2017 instruments. However, this trend was reversed last Tuesday as average yield fell by four basis points to 16.8% ahead of the July Bond Auction.

But on Wednesday, the Debt Management Office offered N35 billion of the JUL 2021 (Subscription: N9 billion, allotted: N3.9 billion); N50 billion of the MAR 2027 (Subscription: N55.3billion, Allotted: N47 billion); and N50 billion of the APR 2037 (Subscription: N64.8 billion, Allotted: N55.1billion) instruments at marginal rates of 16.24%, 16.25% and 16.25% respectively.

“The short tenored instrument (JUL 2021) was undersubscribed by 0.3x while the longer dated MAR 2027 (1.1x) and APR 2037 (1.3x) instruments were oversubscribed due to the expectation of lower interest rates in the medium to long term. “Average yield marginally rose one basis point on Thursday but moderated on Friday to eventually settle at 16.8%, down one basis point week-on-week,” they added.

Also, the performance of the treasury bills market remained bearish last week as yields trended upward on 4 of 5 trading days. The week opened on a negative note as average yield climbed 29 basis points and trended higher last Tuesday (+31basis points), Wednesday (+23 basis points) and Thursday (+26 basis points). However, average yield dropped 40 basis points last Friday as buy sentiment was seen across instruments, to close the week at 18.3 per cent (up 33 basis points week-on-week).

But, this week, treasury bills worth N23.7 billion, N39.2 billion and N35 billion for the 91-day, 182-day and 364-day tenors would be maturing and the CBN is expected to roll over these exact amounts.

Nonetheless, the Central Bank of Nigeria is expected to continue with its aggressive OMO mop ups while OBB and overnight rates remain in the double digit band.

They anticipated that this week, the average yield would remain at similar levels as investors look towards deliberations from the Monetary Policy Committee meeting next week.

Against the bearish trend in the prior week, sentiment on sub-Saharan Africa’s Eurobonds strengthened last week as yield declined on all trading instruments week-on-week.

The Ivory Coast and Ghanaian Eurobonds received the most interest as average yield declined 36 basis points and 29 basis points respectively week-on-week.

This improvement in sentiment came on the back of previous sell offs which were stoked by expectation of a Fed rate hike. The Kenyan 2024, Nigerian 2023 and Zambia 2024 instruments remained the best performing with year-to-date return of 5.6%, 5.4% and 5.1% respectively.

However, performance in the Corporate Eurobond market was mixed. The ACCESS 2017 received the most buy interest followed by the FIDELITY 2018 and ACCESS 2021 while investors sold off on the UBA

Interbank Market

The open buy back (OBB) and overnight tenor of the Nigerian Interbank Offered Rates (NIBOR) closed at 25.3% and 28.2% respectively last Monday, up 10.3% and 11.2% respectively from the prior Friday as financial system liquidity opened the week in a deficit of N104.1 billion, due to the debit for OMO sales from the previous week.

The CBN floated OMO auctions on all trading days save for Wednesday as the DMO conducted its monthly bond auction which mopped up a total of N105.9 billion from the financial system. However, the impact on system liquidity was minimal following OMO maturities worth N89.9 billion which hit the system on Thursday. System liquidity improved in all sessions and gradually turned positive on Thursday with a balance of N26.9 billion whilst OBB and OVN rate declined on all days save for Friday (OBB and overnight rate rose 1.7 per cent and 1.5 per cent respectively), to eventually close the week at nine per cent and 9.8 per cent, indicating a respective six per cent and 5.5 per cent week-on-week decline.

Forex Market

The recent stability in the foreign exchange market has waxed stronger owing to increased volume and frequency of interventions by the CBN as well as the establishment of the Investors’ & Exporters’ (I & E) FX window.

The I & E currency window for investors and exporters has traded around $3.83 billion since it was established with the naira trading more strongly than on the black market. The window, where buyers and sellers are free to agree an exchange rate, was introduced in April to try to attract foreign investors into the country and boost the supply of dollars.

Traders said $407 million were traded last week compared with $354.8 million in the previous week, indicating a gradual return in investors’ confidence to the West African nation’s foreign exchange market.

“We have seen continuous improvement in dollar inflow into the market in recent time from offshore investors and this has also reflected in the volume of transactions at the equity market,” one currency trader told Reuters.

Before the window was introduced, the central bank was the main supplier of hard currency on the interbank forex market, after foreign investors fled naira assets in the wake of an oil price slump in 2014.

A central bank spokesman last month said the bank was, on average, responsible for less than 30 per cent of trading in the investor market.

The window, however, has effectively introduced yet another exchange rate to the five already in operation. These include a retail rate set by licensed exchange bureaus, as well as official and black market rates.

Accordingly, the domestic currency marginally improved last week to settle at N305.95/US$1 on Friday, up from N306/US$1 the previous Friday. However, at the parallel market, rates appreciated from N370/US$1 in the previous week to N367/US$1 on Monday. While on Tuesday the naira depreciated to N368/US$1 and remained at that level till the end of the week. At the I &E window (NAFEX segment), the naira/dollar exchange rate at the start of the week stood at N364.83/US$1.00 but depreciated to N365.20/US$1.00 by the end of the week.

CBN Governor, Mr. Godwin Emefiele told Arise TV at the weekend that the I & E window was opened up for more and more people who are interested.

“That was why we introduced the I & E window. We said if you want forex you can go to that market and buy it once it fits the pricing structure of the goods or whatever you want to do.

“And that has helped to some extent in complementing the flow of forex into the market and has resulted in the appreciation that we have seen. It is the market that determines the direction of the exchange rate,” he said.

According to him, the central bank feels gratified to have seen a movement from as high as N500/$1 and converging heavily southward to its present value of about N360 to the dollar.

“All we need to do is to keep monitoring the market and ensuring that if there are certain areas we need to address, we address them. By doing that, we would see more flows into the economy, which would help grow the economy,” he said.

The Central Bank of Nigeria last week continued its foray into the foreign exchange market by injecting a total of $142.5 million into the interbank.  A breakdown of the intervention indicated that the Bank offered the sum of $100million to dealers in the wholesale segment, while it allocated the sum of $23 million to the small and medium scale enterprises (SMEs) segment. Those requiring foreign exchange for invisibles such as tuition fees, medical payments and Basic Travel Allowance (BTA) received $19.5 million.

Meanwhile, the FMDQ OTC Futures Market has continued to record minimal activities since the upward revision of prices in April.

The value of open contracts improved by US$30.5 million, from US$2.8 billion the preceding Friday to close at US$2.8 billion last Friday.

This week, the NG/US JULY 2019 OTC contract with total subscription of US$657.6m will be maturing. In line with trend, we expect the CBN to replace this maturing contract with the NGUS JULY 2018 instrument.